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How to Integrate Risk Appetite Information to Improve Price Momentum Based Strategies

How to Integrate Risk Appetite Information to Improve Price Momentum Based Strategies

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Categories:Types, Research
Published by: Grenoble Ecole de Management on Nov 09, 2010
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11/09/2010

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How to integrate Risk Appetite information toimprove Price momentum based strategies
Philippe Dupuy, Ph.D, Associate Professor  Accounting, Law and FinanceGrenoble Ecolede Management 
 
M
omentum strategies
PositionsinMSCI-EMUarefullyfinancedatEURLibor3-monthandreseteveryweek(nocapitalization).
B
uying assets that have over performed in therecent past.
J
egadeeshand Titman (1993, 2001).
M
omentumeffects tend to persist across equity styles (Fama-French factors), across international regionalequities.
B
ased on autocorrelation properties of financialseries
U
sual strategies: rank assets according to factors(
B
eta, P/
B
, P/E,«) and buy first n quintile versuslast n quintile (quintile might be overlapping)
 Also arbitrages between market indices and cashexhibit autocorrelation. Therefore momentumstrategies should work.
 
M
omentum strategies for market index
M
omentumstrategiesforindicesperformpoorly.
Theperformanceofthemarket(thesignal)mightbeduetosizeeffects(w
i
),and/oidiosyncraticriskpricing(e
i
)whichhavefewtodowithmarketorsystemicmomentumandcreatenoiseinthesignal.
W
eapplyamethodologytocorrectthisbias(seeKumarPersaud2001,GaiVause2006andDupuy2009)andcalculateapure³riskappetite´indicatorenablingonetoimplementmomentumstrategiesonmarketindices.
Momentumstrategies:thesignalisthen-weekobservedreturn.PositionsinMSCI-EMUarefullyfinancedatEURLibor3-monthandreseteveryweek(nocapitalization).

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